Are investors finally starting to grasp that a world paralyzed by a deadly global viral pandemic which has crippled consumer and producer sentiment, and may result in millions of deaths, can not be simply rebooted by central banks printing a few trillions dollars?

The answer has yet to emerge but for the second day in a row shares across the world and US equity futures fell – set for their worst week in four – as investors dumped riskier assets for the safety of bonds and gold, with coronavirus cases in China rebounding and soaring in South Korea.

“U.S. and EU equity markets have been sold across the board with core global yields benefiting from safe-haven flows,” said Rodrigo Catril, a senior FX strategist at NAB.

US index futures were all deep in the red, after stocks in Korea and Hong Kong saw declines of more than 1%, as the MSCI world equity index fell 0.2%, while MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 1%. E-Mini futures slipped 0.3%. The Stoxx Europe 600 Index was initially down 0.3% before erasing much of the decline, with losses in energy and automaker shares countering gains in utilities and banks.

Earlier in the session, Asian stocks fell, led by IT and energy companies, amid renewed concerns about the impact of the coronavirus as cases surged. Most markets in the region were down, with South Korea’s Kospi and Hong Kong’s Hang Seng Index falling more than 1%, while the Shanghai Composite advanced. Trading volume for MSCI Asia Pacific Index members was 23% above the monthly average for this time of the day. Worries are growing that the coronavirus is spreading outside of China, with the number of cases in South Korea surpassing 200. Investors are now trying to gauge the impact the outbreak will have on corporate earnings. The Topix was little changed, with V-cube rising and Misawa falling the most. The Shanghai Composite Index rose 0.3%, with Shanghai Zijiang Enterprise Group and Anhui Xinli Finance posting the biggest advances.

The declines in stocks come as manufacturing data in Australia and Japan added to worries about slower economic growth, while weak South Korean export data weighed on the won.  China reported a jump in new infections despite once again changing the definition of a “case” intentionally to give the impression that it has nearly defeated the pandemic (spoiler alert: it hasn’t), with finance leaders from the Group of 20 major economies meeting in Saudi Arabia over the weekend set to discuss risks to the global economy stemming from the outbreak. Though investors have been sanguine about the long term economic risks from the virus, a steady drip of new cases in countries beyond China has kept worries gnawing away, with South Korea on Friday recording over 100 new cases, doubling overnight in a representation of what a true, unmanipulated exponential curve looks like.

Underscoring the economic impact from the coronavirus, the International Air Transport Association (IATA) estimated losses for Asian airlines alone could amount to almost $28 billion this year, with most of that in China. Corporate earnings are increasingly under threat as U.S. manufacturers, like many others, scramble for alternative sources as China’s supply chains seize up.

“It’s risk-off – bonds are being bought again and hedges are being put into play at the moment,” said Olivier Marciot, investment manager at Unigestion. Not helping the nerves were manufacturing surveys underscoring the grim state of the Japanese economy. Japan’s purchasing managers’ index dropped to 47.6 in February, from 48.8, marking the steepest contraction in seven years; just days earlier Japan reported its worst quarterly GDP print in five years, suggesting a technical recession in Q1 is now guaranteed absent some miracle.

European surveys painted a somewhat brighter picture, with French business activity growing faster than expected in February on a rebound in the service sector. Germany’s private sector expansion also held steady, although as Markit notes, half the increase in the German mfg PMI was due to slower delivery times which, of course, are a function of the coronavirus and not tightening supply-side (which is traditionally bullish). As such there will be a violent reversal lower once manufacturing managers realize what is behind the supply chain slowdowns, but not just yet.

“It may be a much longer road,” Dan Farley, chief investment officer of the investment solutions group at State Street Global Advisors, told Bloomberg TV in Sydney about the virus impact. “We have to be very mindful that this is not an easily solvable issue and the impact on consumer demand for a number of different sectors is going to be something that we need to be watching out for.”

As risk assets sold off, Treasuries climbed, pushing the yield on 10-year securities below 1.5% for the first time since September. Yields on 30-year U.S. Treasuries fell below the psychologically important 2% level to the lowest since September 2019. Yields on 10-year notes were down 9 basis points for the week at 1.498%, lows last seen in September. Ten-year German government bond yields fell to a four-month low DE10YT=RR, with the entire yield curve on the cusp of turning negative. The entire Dutch yield also returned to negative territory.

In FX, the dollar was little changed against a basket of major peers after a four-day winning streak. The euro strengthened from three year lows after data showed economic activity in the common-currency area rebounded unexpectedly due to a misread of delayed supply chains. The most spectacular gains had come on the Japanese yen, as a run of dire domestic data stirred talk of recession there and ended months of stalemate in the market. Still, the yen rallied on Friday, gaining 0.5% against the dollar in European trading to 111.51 though the greenback was still set for its best week since July 2018 with a rise of 1.7%.

“It was too soon to write off the yen as a safe haven,” said Mayank Mishra, an FX strategist at Standard Chartered in Singapore. “I think the yen is reasserting its status as a safe haven.”

Another casualty of its close trade ties with China was the Australian dollar, which plumbed 11-years lows

In commodities, crude oil fell after hitting the highest in almost four weeks in the wake of a surge in U.S. exports and a dramatic slowdown in the expansion of domestic inventories. Gold was last up 0.8% at $1,631.16 having added 3.1% for the week so far to seven-year highs

Expected data include PMIs and existing home sales. Deere is among companies reporting earnings

Market Snapshot

• S&P 500 futures down 0.4% to 3,356.00
• STOXX Europe 600 down 0.4% to 428.39
• MXAP down 0.5% to 166.47
• MXAPJ down 1% to 545.44
• Nikkei down 0.4% to 23,386.74
• Topix down 0.03% to 1,674.00
• Hang Seng Index down 1.1% to 27,308.81
• Shanghai Composite up 0.3% to 3,039.67
• Sensex down 0.4% to 41,170.12
• Australia S&P/ASX 200 down 0.3% to 7,138.96
• Kospi down 1.5% to 2,162.84
• German 10Y yield fell 0.3 bps to -0.447%
• Euro up 0.3% to $1.0816
• Italian 10Y yield fell 4.7 bps to 0.74%
• Spanish 10Y yield fell 1.4 bps to 0.212%
• Brent futures down 1.5% to $58.41/bbl
• Gold spot up 18% to $1,634.93
• U.S. Dollar Index down 0.3% to 99.62

Top Overnight News

• While China had the vast majority of cases and deaths before, there are now signs that infections are spreading more rapidly within other Asian countries
• Fear of the spreading coronavirus has turned the yen from a haven asset to a liability. The Japanese currency has slumped about 2% against the dollar this week to its weakest in 10 months, even as traditional havens gold and Treasuries pushed higher
• China car sales plunged 92% during the first two weeks of February as the coronavirus outbreak kept buyers away from showrooms
• The last snapshot of the U.K.’s public finances before the March 11 budget show the budget deficit is rising more slowly than the Office for Budget Responsibility predicted. It means that borrowing in the fiscal year through March is likely to come in below the 47.6 billion pounds ($61 billion) estimated
• The Swiss National Bank appears to be content for now to allow the franc to drift higher, with little evidence that it’s getting into a dogfight with markets. While reluctance to aggressively sell the franc may be partly driven by fear of being labeled a currency manipulator by the U.S., SNB data also suggest the valuation may not be so extreme as it appears
• Bank of Japan Governor Haruhiko Kuroda said that, while the central bank will keep monitoring the benefits and side-effects of its policy, there’s no need for an overall framework review now
• As pressure mounts on Sweden’s central bank to reconsider negative interest rates, board members are signaling they’d rather rely on bond purchases to support the largest Nordic economy

Asian equities traded with downside bias after a weak handover from Wall Street, which saw notable mid-day selling despite a lack of fresh fundamental drivers, with some pointing to technical and algo-related action driving the downside. ASX 200 (-0.3%) conformed to the broad risk tone as the index pulled back further from its recent record high. Nikkei 225 (-0.4%) swung between gains and losses, with downside cushioned to an extent by a predominantly weaker JPY. Meanwhile, index heavyweight Softbank’s shares rose in almost 3% after the Sprint and T-Mobile boards unanimously approved the merger amendments brought up by the latter’s parent company Deutsche Telekom – for reference Softbank owns 84% of Sprint whilst Deutsche Telekom controls 63% of T-Mobile. Elsewhere, Hang Seng (-1.1%) lagged as all stocks resided in negative territory for most of the session, and with gambling name underperforming as Macau casinos continue to cautiously reopen, but with business limited amid the city’s stringent controls on visitor entry and with ferry suspensions from Hong Kong. Meanwhile, Shanghai Comp (+0.3%) traded warily earlier in the session, although the index clambered off lows and rose to session highs after a MOFCOM official stated that the government is speeding up the study of new measures to further support companies from the impact of the virus outbreak. Finally, KOSPI (-1.5%) posted heavy losses amid the rising domestic COVID-19 cases, with President Moon also reportedly considering raising the alert level over the spread in the country.

Top Asian News

• Japan Bourse Outlines New Stock Market Structure, Listing Rules
• Thai Court Disbands Opposition Party, Boosting Army-Backed Ruler
• HNA Bond Euphoria Cools as Market Weighs State Takeover Talk

European equities initially kicked the final trading session of the week off with shallow losses before slipping further into negative territory (Eurostoxx -0.3%) as reports of increased coronavirus activity in South Korea continues to weigh on risk sentiment. Downticks in futures were observed alongside reports in Yonhap that South Korea reported a further 48 cases of the coronavirus, bringing the total to 204, before losses were trimmed in the wake of a firmer than expected services PMI from France and a pickup in the manufacturing metric from Germany; bourses remain in negative territory nonetheless. Sectors are broadly lower with energy and material names lagging their peers, whilst IT names are of the only sectors to trade higher, following yesterday’s underperformance yesterday. Individual movers include UniCredit (-3.4%) amid reports suggesting that CEO mustier has emerged as a potential frontrunner for the HSBC top job. Elsewhere, Pearson (-3.4%) are a notable laggard after posting disappointing pretax profit metrics, whilst Renault (-1.3%) shares opened lower amid reports of Nissan production delays in China.

Top European News

• German Economy Faces Coronavirus Hit as Export Orders Sink
• U.K. Economy Is Picking Up Despite Coronavirus Concerns
• Riksbank Doesn’t Rule Out U-Turn on Negative Rates, Points to QE
• SNB Isn’t Panicking About the Franc And Here’s a Reason Why

In FX, after a recent series of gains, the USD has paused for breath during today’s session and pulled back from the recent high of 99.915 to a current low of 99.593. The dollar’s decline has partially been a result of the firmer EUR, but also a resurgence in JPY as USD/JPY moves back below 112.00 to make a session low of 111.50 thus far. In terms of fundamental factors, not a great deal has changed in terms of the narrative surrounding Japans outlook since yesterday’s JPY declines. However, overnight saw commentary from the Japanese Finance Minister who said the government will respond to FX moves as needed, whilst the economy minister attributed recent JPY softness to the strength in the US economy. That said, Q4 growth metrics earlier in the week and concerns about the coronavirus-related drag on the Q1 outturn, remain in place. As such and as per inferences from ING yesterday, today’s move is more likely a by-product of exhaustion in the recent USD/JPY rally, with 100.00 in the DXY still yet to be crossed.

• EUR – After finding support during yesterday’s session at 1.0778, EUR was lent a helping hand by aforementioned USD softness and encouraging PMI metrics from the Eurozone. Gains were stoked in early EU trade by French PMI metrics, which, although saw the manufacturing sector slip into contractionary territory (49.7 vs. Exp. 50.7, Prev. 51.1), was offset by a firmer services reading (52.6 vs. Exp. 51.3, Prev. 51.0) and therefore provided some pushback to concerns over potential cross-sector spillovers (i.e. manufacturing weakness into services). Gains for the EUR were cemented thereafter with EUR/USD reclaiming 1.0800 to the upside after a jump in the German manufacturing metric to 47.8 from 44.8 with the pair topping out at 1.0820 with the April 24th 2019 low of 1.0821 kicking in as resistance. In recent trade momentum for EUR has stuttered with the pair slipping back below 1.0800. Overall for the PMIs, the EZ-wide composite figure rose to 51.6 from 51.3 (Exp. 51.0) with Markit concluding that the data points were consistent with a quarterly GDP growth rate approaching 0.2%. As a note of caution, analysts at Pantheon Macroeconomics concludes that despite the strong headline, the release is effectively warning that the supply side is being choked, and if that continues, growth and employment eventually will take a hit.
• GBP – Ahead of PMI metrics, GBP was granted some reprieve by declines in the USD as the pair reclaimed 1.2900 to the upside as investors awaited confirmation/rejection of the post-election ‘bounce’ in the UK economy. Upon the release, GBP was granted some further upside to breach 1.2925 (fib resistance and post-retail sales highs) as a marginal miss in the services component (53.3 vs. Exp. 53.4) was offset by an unexpected expansionary manufacturing print (51.9 vs. Exp. 49.7). Should gains for the GBP accelerate, technicians’ flag 1.2949 (Feb 13th low) as the next potential source of resistance. Overall Markit concluded that “the recent return to growth signalled by the manufacturing and services PMIs provides a clear indication that the UK economy is no longer flat on its back”. That said, as the EU squabbles over its negotiating mandate in trade talks with the UK, focus for the UK narrative, will at some stage, begin to tilt more towards trade talks at the beginning of next month.
• AUD/NZD – AUD and NZD largely moved in tandem with the USD throughout a bulk of APAC session before succumbing to downside as the Chinese Commerce Official stated that he expects China’s Jan-Feb import and export growth to fall back notably. AUD/USD breached mild support at 0.6610 and gave up its 0.6600 handle to fall to an 11yr low, with the session trough currently at 0.6587; a break below this level could open up a test of the March 11th 2009 low of 0.6567, with further support below at 0.6513 (March 13th 2009 low). Its antipode counterpart, has suffered a similar fate with NZD/USD slipping below touted support at 0.6325 (11th and 12th November lows) ahead of the all-important psychological support at 0.6300; a move below this level could open up a test of the 17th October 2019 low of 0.6281.
• SEK – Little traction in the Krona following the release of the account of the February meeting with EUR/SEK maintaining its 10.5777-10.61 range post-release. In terms of the content of the account, the Bank ultimately resides in a “wait-and-see” mode, as opined by Governor Ingves. That said, commentary from December dissenters Breman and Jansson drew some attention with the former noting that domestic and international factors and their impact on the Swedish economy could be underestimated, whilst the latter suggested it is currently highly improbable that a tighter monetary policy will become appropriate. Ultimately, several members were of the view that positive inflation surprises would not necessarily involve rates being raised earlier than forecast. Furthermore, as highlighted by Nordea, the account also suggests that the Riksbank would be more likely to turn towards the balance sheet as a course of stimulative action, as opposed to lowering rates.

In commodities, WTI and Brent prices are once again in the red, as sentiment has failed to recover from the broad sell-off in US hours; with multiple reasons for this being touted. Crude specific newsflow has been light this morning, focus for the complex has returned to demand concerns on reports of further virus cases in South Korea as well as the first few in Italy. As well as the demand narrative, attention is on geopolitical headlines emanating from Libya as Haftar has reportedly said he is prepared for a ceasefire under the condition of Turkish troops and mercenaries leaving the region. Turning to spot gold, which has continued its grind higher to fresh YTD highs of USD 1636.5/oz on the aforementioned deterioration in sentiment. From a technical perspective, there is little in the way of firm resistance until USD 1696.20/oz, which is the 22nd January 2013 high; as the yellow metal also derives support from a softer USD this morning. Elsewhere, base metals have failed to stage a firm recovery on the USD’s weakness this morning as the downside in sentiment overrides any potential gains.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, est. 51.5, prior 51.9
• 9:45am: Markit US Services PMI, est. 53.4, prior 53.4
• 9:45am: Markit US Composite PMI, prior 53.3
• 10am: Revisions: Existing Home Sales
• 10am: Existing Home Sales, est. 5.44m, prior 5.54m
• 10am: Existing Home Sales MoM, est. -1.81%, prior 3.6%

DB’s Jim Reid concludes the overnight wrap

After a brief but sizeable risk off move yesterday that saw the S&P 500 move from positive territory to down more than a percent in the last half hour of European trading (close -0.38% and more detail later), today’s flash PMIs will be an important measure of how activity is shaping up in February in the heat of the Coronavirus crisis and shut downs.

Overnight Japan’s flash manufacturing PMI came in at 47.6 (vs. 48.8 in January), which marks the sharpest deterioration in conditions in more than seven years. The services PMI plunged back into contractionary territory at 46.7 (vs. 51.0 in January) bringing the composite PMI to 47.0 (vs. 50.1 in January). Joe Hayes, an economist at IHS Markit, flagged the impact on the services sector of reduced tourism due to the virus while saying that the “latest PMI data dash any hopes of a first quarter recovery in Japan and significantly raise the prospect of a technical recession in the world’s third largest economy.” We also saw Australia services PMI decline into contractionary territory at 48.4 from 50.6 in January, marking the lowest reading since the index began. However the manufacturing PMI was relatively stable at 49.8 (vs. 49.6 in January) bringing the composite PMI to 48.3 from 50.2 in January.

The flash PMI data today includes that for the Euro Area, France, Germany and the UK as well as the US this afternoon. Generally speaking the data in Europe is expected to see a drop of around half a point for the manufacturing prints and slightly less for services. Specifically for the Euro Area the manufacturing reading is expected to fall from 47.9 to 47.4 and the services from 52.5 to 52.3 although in fairness for the manufacturing reading outside of last month, that level would still be the highest since June last year. In the US the manufacturing print is expected to fall 0.4pts to 51.5 but the services reading to hold steady.

If you wanted to know how uncertain the impact will be on activity look no further than the range of estimates forming the consensus readings. For the Euro Area manufacturing print for example it’s anywhere from 45.5 to 48.1, so a range of 2.6pts. For the flash January print the range was 1.3pts and December just 0.9pts. In fact this is the highest range that we can find since August last year.

The latest on the virus is that South Korea reported 52 additional cases overnight bringing the total in the country to 156, a 5 times increase from earlier this week. Much of the new cases in South Korea are being reported in Daegu, where officials have shut down public facilities and advised residents to stay indoors. In China, confirmed cases now stand at 75,465 with deaths at 2,236. Also, raising concerns on the quality of reporting from China, Hubei earlier reported 411 additional cases, but the NHC said Hubei had 631 new cases and following this Hubei revised its reported number higher. On a more micro level, China’s Passenger Car Association said in a report that car sales plunged 92% during the first two weeks of February because of the virus outbreak. Elsewhere, the International Air Transport Association said yesterday that it expects the first annual decline in global passenger demand in 11 years as the assessment of the virus impact led it to shave c.4.7pp off of a passenger-growth forecast issued just two months ago, with almost all of the impact in the Asia-Pacific region. Global passenger demand is now seen contracting by -0.6% this year, compared with a December forecast for 4.1% growth, IATA said.

Overnight, the spread of the coronavirus outside of China is keeping markets in check with the Kospi (-1.50%) and Hang Seng (-0.89%) leading declines. The Nikkei (-0.39%) is also trading lower after erasing earlier gains while the Shanghai Comp (+0.36%) is trading up after a weak start perhaps on fresh stimulus hopes. Futures on the S&P 500 are down -0.36% and yields on 10yr USTs are down -2.5bps to 1.491% and trading below 1.5% for the first time since September. In keeping with the risk off, crude oil prices are down c. -0.70% this morning while spot gold prices are up +0.51%. As for other overnight data releases, Japan’s January CPI and Core CPI both came out in line with consensus at +0.7% yoy and +0.8% yoy respectively.

As for markets yesterday, a late US morning dip saw equities initially fall sharply from their recent highs before recovering most of the lost ground. The S&P 500 closed -0.38% with the NASDAQ -0.67%. The fundamental reason for the sell-off seemed to revolve around Coronavirus-related headlines. A central Beijing hospital reports 36 new cases (per China’s Global Times), a sharp increase from two weeks earlier and raising concerns around a super spreader event. The other market-moving headline was out of the virus’s epicenter, where the government in Hubei said it will extend the business shutdown until 10-Mar – more than 6 weeks after the Lunar New Year holiday was supposed to end. The more technical reason that was posited centered around the timing and volumes. Given that the Momentum factor was down greater than 1 std dev vs. Value up just over 1 std dev, it could have been an unwind of a big winning factor trade over the last year by a European trading program. S&P 500 futures volume over the 20 minute period starting at 11:30 AM ET as prices were accelerating to the lows, was over 50B notional and the largest volume observed in that ~25 minute period for the past 6 months. So it could have been a big trade. Either way, Technology stocks (down -1.04%) in particular were the biggest driver of the move lower, especially semiconductors, which finished down -1.53%.

Safe havens were well bid as a result. Indeed Gold was up another 0.50% last night and has now risen in five of the six last sessions. Over the same time frame the S&P 500 has been down -0.18%. Meanwhile US 10y yields were another -4.9bps lower last night with the curve flattening once more, 2s10s down to 12.8bps (c10bps this morning) meaning the curve has flattened for 6 consecutive sessions including this morning. 30 year yields were -5.2bps yesterday and are down a further -3bps this morning to an all-time low of 1.932%. Treasuries were stronger even after the Fed’s Clarida described the US economy as “solid” and the labour market “very strong and robust”. He also didn’t sound particularly concerned about the impact of the coronavirus with most of his comments sticking to the Committee’s narrative.

In other news, the data in the US yesterday included a very strong February Philly Fed index print (36.7 vs. 11.0 expected). That represented a bounce of 19.7pts from January and a reminder that the January reading itself was up 14.6pts from December. So that is the largest monthly rise since June 2009 and two-monthly rise since February 2002. A word of warning however that the warm weather this winter appears to be having an outsized impact on the data.

Elsewhere the latest weekly claims reading was up 4k to 210k but continues to remain historically low. Meanwhile the January leading index rose +0.8% mom versus expectations for +0.4%. In Europe the most significant data was the January retail sales figures for the UK where ex fuel sales rose a better than expected +1.6% mom (vs. +0.8% expected). That follow five consecutive months of essentially no retail sales growth in the UK so an encouraging sign. The other UK data was the latest CBI survey which showed an improvement of 4pts for total orders. Sterling closed at $1.288 yesterday, the lowest since late November.

In other news, the ECB released the accounts of the January ECB meeting yesterday, however there wasn’t a huge amount to take away. Our economists noted that the more positive tone around the (still negative) balance of risks and some greater confidence on the future normalisation of inflation were the main changes versus December. However, with the meeting coming at the time of a two-year peak in economic data surprises, this change is out of date now – with data surprises again turning negative, even before any impact of the coronavirus. The overall tone on policy is one where the bar for near-term policy changes is high.

This weekend Nevada will be the site of the third Democratic presidential primary which like Iowa is a caucus. This means more voting by moving around a gymnasium (or casino ballrooms) than by submitting a blind ballot. The Democratic Party in Nevada has taken steps to avoid their Iowan counterpart’s counting problems so hopefully we’ll have a clean and smooth process. Bernie Sanders is the overwhelming favourite with betting odds having the Senator at 88%. There have been very few high-quality state polls though. Given the low count of polls, there is a lot of uncertainty and the results could alter momentum or narratives going into South Carolina next week. Former Mayor Bloomberg may be written in at that point but he is not technically on the ballot, having entered the race too late.

Looking at the day ahead, the obvious focus will be the aforementioned PMIs in Europe this morning and the US this afternoon. Away from that we’ll also get January public sector net borrowing data for the UK, final January CPI revisions for the Euro Area and January existing home sales data in the US. Away from that the Fed’s Kaplan, Brainard, Clarida and Mester are all due to speak today while the ECB’s Lane and BoE’s Tenreyro are also speaking.

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